At the beginning of 2016, Gannon Company received a three-year zero-interest-bea

Question

At the beginning of 2016, Gannon Company received a three-year zero-interest-bearing $1,000 trade note. The market rate for equivalent notes was 8% at that time. Gannon reported this note as a $1,000 trade note receivable on its 2016 year-end statement of financial position and $1,000 as sales revenue for 2016. What effect did this accounting for the note have on Gannon's net earnings for 2016, 2017, 2018, and its retained earnings at the end of 2018, respectively?

a. Overstate, overstate, understate, zero

b. Overstate, understate, understate, understate

c. Overstate, overstate, overstate, overstate

d. Overstate, understate, understate, zero

PLEASE write down the CORRECT general entries for all transactions!!!!

Explanation / Answer

d.Overstate, understate,understate, zero.

reason:

In 2016 only interest on notes receivable is to be recorded as income, but whole of $1,000 is recorded as sales revenue, so it results in overstatement of net income and inturn retained earnings.

In2017 and 2018 the interest on trade note is to be recorded but none is recorded, since all of the revenue is recognised in 2016 itself, resulting in understatement of net earnings.

By the end of 2018 , the remaining interest on notes receivable is to be entered and but it was erroneously recoreded in 2016, now the error made in 2016 is evened out and the retained earnings will be correct despite this error.

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